Special-Situation Central: Play the Arbitrage Game on This Stock to Spark a 25% Profit Opportunity
Last month, we launched Special-Situation Central in TradeSmith Daily — a new feature that you can look forward to at least once per month.
Special-Situation Central is where we sift through the market morass of possible situational investing plays, identify those with the most promise, and bring you the one that matters most.
We'll run these special situations through our proprietary analytics and show you how to navigate them. We'll spotlight the ones to buy — and help you strategize how to buy them. And we'll occasionally zero in on one to avoid, highlighting the risks and explaining why you should steer clear.
We'll tap into our corral of investing experts — including Senior Analyst Mike Burnick, myself, and others — to give you our unique take on the special-situation play we've brought you.
And we'll do it all for free as one more way for us to create even more value for our followers and fans here at TradeSmith.
In this latest edition of Special-Situation Central, we're focusing on an arbitrage play that could spark a 25% profit opportunity in a very short time for forward-looking investors.
There aren't any complicated strategies behind this, either — it would be as easy as buying and holding a stock and then getting rewarded for your foresight.
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There may be a general perception out there that video games are for kids, but the data tells a different story.
In the U.S., the average gamer is 34 years old, owns a house, and has kids of their own. In fact, people under 18 make up only 21% of video game players, while 26% are aged between 34 and 54.
So, this isn't an industry that depends on children begging their parents for a new game — it's one where adults spend their hard-earned money buying video games for themselves.
It's also an industry that's expected to climb in revenue from $235.7 billion in 2022 to $321.1 billion by 2026.
And one company that's synonymous with video games is Activision Blizzard Inc. (ATVI).
Activision Blizzard is one of the world's top-10 gaming companies, ranking fifth last year after it brought in $8.8 billion in net revenue.
Its gaming roster includes familiar names like Call of Duty, World of Warcraft, and Candy Crush Saga. The Call of Duty franchise alone has surpassed $30 billion in lifetime revenue since 2003.
With such valuable franchises, it's no wonder that Activision Blizzard caught the attention of Microsoft Corp. (MSFT), which announced on Jan. 18 that it would acquire ATVI for $95 per share in an all-cash transaction valued at $68.7 billion.
Microsoft is the maker of the ultra-popular Xbox gaming console. The company also runs a lucrative game business that generated $15 billion in 2021.
Together with Activision Blizzard, Microsoft would have 14% control of the $175 billion video game industry.
ATVI shareholders voted to approve the transaction in April, but the deal still faces regulatory scrutiny.
One of the concerns coming from the United Kingdom's Competition and Markets Authority (CMA) is that Microsoft could refuse to give competitors access to Activision's games. For example, Microsoft could theoretically refuse to release new launches of the Call of Duty series for PlayStation consoles.
The pending acquisition is also facing an in-depth probe in Brussels.
This uncertainty is why it's important to weigh the risks and potential rewards of special-situation investments.
If the deal doesn't go through, you would have to be comfortable with owning ATVI on its own merit.
The Berkshire Confidence Booster
In October and November 2021, just before the Microsoft deal was announced, Berkshire Hathaway Inc. (BRK.A) purchased 14.66 million ATVI shares. At an average cost of about $77 per share, Berkshire's investment came to a grand total of around $975 million.
According to Warren Buffett, the mastermind behind Berkshire, it wasn't his investment — and Berkshire had no knowledge of Microsoft's acquisition plans at the time of its purchase.
“In any event, the investment manager's $77 per share purchase could have been replicated after the Microsoft proposal was announced at a price of $78 or so,” Buffett wrote in a letter sent to reporters in February 2022. “His purchase was no bonanza of any sort for him or Berkshire.”
Making that investment with no knowledge of the upcoming acquisition announcement is a huge boost of confidence — it means Berkshire was judging Activision Blizzard on its own merit and saw something it liked in the company.
That's a boost of confidence.
Another confidence boost comes from what our tools are saying about ATVI.
TradeSmith's Health Indicator has Activision Blizzard in the Green Zone as a medium-risk investment with a Volatility Quotient (VQ) of 23.10%.
As with any acquisition, there's always a chance the deal won't close, and your individual risk appetite will help you determine if ATVI is worth adding to your portfolio.
The risk may not be worth the reward if you're not comfortable having a company that solely develops video games in your portfolio.
But for those of you who are comfortable with Activision and see the upside in the video game market…
If the deal closes with Microsoft paying $95 per share for ATVI, as of this writing, ATVI shareholders could make a 25% return.
If the deal does not close, shareholders would still own a company that is in our Green Zone, pays a dividend with a yield of 0.62%, and is backed by Berkshire Hathaway.
Enjoy your Tuesday,
Keith Kaplan CEO, TradeSmith
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TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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